Loys takes a while to get there, but he convinces Judge Gustafson that the record in his blower case isn’t all it should be. So Judge Gustafson places both Loys’ motion for more discovery and IRS’ motion for summary J in a holding pattern until IRS certifies and delivers the entire administrative file, so Judge Gustafson can see if everything is there that should be.

In fact, even Loys’ original Form 211 is missing from the papers thus far filed.

We all know that Section 7623 whistleblowing is different from the mine run of Tax Court cases, because third-party info is involved, and Section 6103 casts a wide mantle over tax return info. Of course, there’s an exception: Reg. 301.6103(h)(4)-1(a) applies here, and the items in the targets’ return are relevant to this proceeding.

Loys claims more IRS people were involved in this case than IRS’s declarations in support of their summary J motion state.

“We cannot resolve this dispute–either in the context of the Commissioner’s current motion for summary judgment, nor later in these proceedings–without having the administrative file before us. This means that, at least for the time being, we must deny the Commissioner’s motion. To enable us to resolve this dispute in due course, and to ensure that Mr. Vallee was provided with the entire administrative record, we will, in a manner analogous to Rule 217(b), order the Commissioner to file with the Court the entire administrative record, borrowing the definition from Rule 210(b)(12), appropriately certified as to its genuineness by the Commissioner or by an official authorized to act for the Commissioner in such situation.” Order, at p. 7.

Takeaway- If your case is a record-ruler, your case stands or falls on that record. Make sure you and the Judge get it all.

Although she was the taxpayer’s friend when she was stationed on the sidewalks of New York, STJ Diana L. (“STJ Di”) Leyden can’t grant blanket anonymity to every whistleblower. Here’s Whistleblower 7208-17W, filed 7/31/18, and he’ll be known here as Eight-Seventeen Whiskey only for the next thirty days, unless he sooner appeals.

Eight-Seventeen Whiskey trumpeted his blower status around the real estate investing community to show he was an “upstander,” one of the righteous, while trying to get his clichés in a row to file his now-bounced 211.

Eight-Seventeen Whiskey was a desk trader who kicked around the investing community with his parabolic trading concept, designed to allow investors holding illiquid assets (like real estate) to take advantage of “vol” (I assume that means volatility). But he came up dry until he got solicited by what he claims was a dodgeflogger. A couple years later (hi, Judge Holmes), and after principals of the alleged flogger were being investigated, he filed his Form 211.

All STJ Di has to deal with here is Eight-Seventeen Whiskey’s Rule 345 anonymity claim.

Much of the opinion deals with Eight-Seventeen Whiskey’s trumpeting his blowerness to all and sundry, claiming that full disclosure and his upstanderness required same. But he also claims a blower’s lot is not a happy one, and tenders a study to prove it.

But Eight-Seventeen Whiskey has no substantive evidence of unemployment, retaliation or threats of physical harm. He wasn’t employed by the blown floggers, and wasn’t a fiduciary. And he has since switched to another field.

“The Court has acknowledged that ‘fears of such harm befalling a confidential informant are reasonable although necessarily difficult to prove.’ Nevertheless, each request to proceed anonymously stands upon its own…, and petitioner must provide some factual basis sufficient and specific enough to allow the Court to determine whether the severity of the asserted risk of harm amounts to more than mere embarrassment or annoyance and outweighs the societal interest of the public’s right to know who is using the Court. Otherwise the grant of anonymity would be automatic in every whistleblower case.” Opinion, at p. 26.

And Eight-Seventeen Whiskey was using publicly-available information (the alleged flogger was pitching far and wide). Of course, IRS hasn’t yet made any dispositive motion, but I expect one will soon be forthcoming.

“Petitioner has established that she devoted many hours to travel during [years at issue]. But there is no evidence to establish a strong link between this travel and her alleged business. To the contrary, at least 24 of her trips involved travel to her daughter’s volleyball tournaments, vacations to Disney World and Europe, and reunions with her sorority sisters. Even if she could plausibly characterize these excursions as ‘marketing trips,’ the travel had obvious personal and recreational aspects. That in turn suggests the absence of a true profit motive. See sec. 1.183-2(b)(9), Income Tax Regs.” 2018 T. C. Memo. 116, at p. 12.

I want to give Kimberly’s counsel, whom I’ll herein denominate as Mike, a Taishoff “Good Try, Forlorn Hope Division.“ He’s playing a losing hand as well as might be expected.

“Petitioner’s argument, in essence, is that she engaged in a business for three years, lost money every year, and decided to quit after concluding that the business would never be profitable. But the sequence of events makes this narrative suspect: Petitioner terminated her … activity shortly after receiving the IRS notice of deficiency in this case, which suggested that the jig might well be up.” 2018 T. C. Memo. 116, at p. 15.

But Judge Scholar Al’s toss of IRS’ belated attempts to up the deficiency and chop Estelle with the five-and-ten doesn’t save Estelle from the deficiency as determined.

Estelle bought marked-down clothing and contributed it to Goodwill, claiming the pre-markdown price as FMV for a charitable deduction. Nice try, Estelle, but “shop till you drop” doesn’t play at 400 Second Street, NW.

“Contrary to petitioner’s view, the FMV of an item is not the price at which a hopeful retailer initially lists that item for sale. By the time petitioner purchased her clothing, Talbots had marked down the prices of those items three or four times. She purchased each item for a small fraction of its original list price. No rational buyer having knowledge of the relevant facts would have paid for these items a price higher than the price Talbots was then charging. Petitioner has failed to establish for the donated items an FMV higher than her acquisition cost.” 2018 T. C. Memo. 117, at pp. 9-10. (Footnote omitted, but read it. Even if Estelle proved FMV exceeded purchase price, as soon as she bought she contributed it, so only short-term capital gain, thus Section 170(e)(1)(A) limits Estelle to FMV.)

The Section 7609(e) subpoena extension has been on the table since the beginning, so no surprise. Anyway, trial isn’t yet scheduled, so Hans & Linda can discover away.

Hans & Linda try the now-obligatory Section 6751(b) Boss Hoss enGraeving (sorry, guys), but the SOL isn’t a penalty. “Even if we were to accept the Lamprechts’ novel suggestion that an extension of the statute constitutes a ‘penalty’ of sorts, it would not be the sort of penalty affected by section 6751(b), which provides that ‘No penalty shall be assessed’. A statute of limitations is not ‘assessed’. The Lamprechts have not demonstrated that section 6751(b)(1) renders futile the Commisioner’s [sic] proposed new argument based on section 6501(e)(1)(A)(i).” Order, at p. 6 (Emphasis by the court; note that the pagination again is idiosyncratic).

All Hans’ & Linda’s other arguments have been out there since the beginning.

“The Lamprechts’ arguments do not establish that the Commissioner ‘cannot prevail on the merits’; rather they oppose the amended answer with counter-arguments concerning disputed facts, which are the type of questions that are not resolved at trial and not at the pleading stage.” Order, at p. 7.

I think Judge Gustafson, who is having a busy day, meant to say “…disputed facts, which are the type of questions that are resolved at trial and not at the pleading stage.” If disputed facts are resolved neither at pleading nor at trial, when and where do they get resolved?

As usual, there is a plethora of players on the ice. And though usually obliging to a fault, Judge Gustafson cannot allow this Calgary Stampede.

“The listing of multiple authors in an expert report is an anomaly in the Tax Court, given this Court’s unique procedure regarding expert testimony: Under Tax Court Rule 143(g)(1), every (singular) ‘expert witness’ must submit a (singular) ‘written report’; and under Rule 143(g)(2) ‘[t]he report will be … received in evidence as the direct testimony of the [singular] expert witness’. A report written by multiple authors cannot really be received into evidence as the direct testimony of one of them. In a trial each witness gives his own testimony and only his own testimony, and the witness then is subject to cross-examination that is limited to the scope of his direct testimony. Fed. R. Evid. 611(b).” Order, at p. 1.

There are seven (count ‘em, seven) motions in limine. The Murfams have one, and the IRS the rest. All denied without prejudice.

So Judge Gustafson held a phoneathon, and got the following result.

“… Murfam may intend that one or more of these five reports is in fact the report of, and reflects the opinions of, one single expert (whom we will call ‘the principal expert’) who warrants the entire report; that Murfam may have named the other experts (whom we will call ‘assisting experts’) only to indicate their work on the report as helpers of the principal expert; and that Murfam may intend to offer the report as the opinion of only that principal expert and to call only that principal expert as their witness.” Order, at p. 2.

But anyway, Murfam must indicate in each report which expert drafted what, have all of them available for trial whether or not they testify, and let Judge Gustafson have the principal experts’ names prontito.

Kat & Ave have a Cadillac truck and a Beemer with odometers that take me back to the used car lots of my youth; they record mileages that HHBJJJIJ finds it hard to credit.

“The purported logs, which were not prepared contemporaneously with Mrs. Taylor’s purported travel, state that Mrs. Taylor drove 130,513 miles on … business: she allegedly drove a 2004 Cadillac truck 41,483 miles and drove a 2006 BMW 89,030 miles. The logs are demonstrably unreliable. For example, when petitioners traded in the 2004 Cadillac truck, Mrs. Taylor signed an odometer disclosure statement which reported the odometer reading at the time of sale to be 102,345 miles; according to the logs, the truck’s December 23, 2013 year end odometer reading was 154,990 miles. Similarly, when petitioners traded in the 2006 BMW, the odometer disclosure statement reported the odometer reading to be 91,333 miles; the purported logs stated that as of December 17, 2013, the odometer read 186,880 miles.

“Moreover, the distances traveled as listed in the logs do not accurately represent the distances between petitioners’ home and the purported business destinations, as demonstrated by the exhibits attached to respondent’s Motion to Take Judicial Notice. We are satisfied that the mileage reported in the logs is inflated. For example, the logs state that Mrs. Taylor drove the 2004 Cadillac truck 1,376 miles and drove the 2006 BMW 701 miles, a total of 2,077 miles, on September 22, 2013. As respondent points out, the driving distance between Manhattan, New York, and Los Angeles, California, is approximately 2,800 miles and ‘[a]t a constant speed of 70 miles per hour (‘MPH’) it would take 29.7 hours to drive 2,077 miles.’ Further, the logs report trips of 1,200 miles to 1,800 miles for other days.” Order, at p. 4.

You must remember the story of the lawyer denied admission to Heaven for misrepresentation; he told St Peter he was 76 years old when he died, but his billing sheets showed he had billed enough hours to have lived to 107.

No, the 10-year sit-down arises because Kat & Ave jiggered the car mileage to get down to EITC country, and got a $4K credit thereby. Section 32(k)(1)(B)(I) imposes the ten-year freeze-out for gameplaying with the EITC. So Kat & Ave must wait ten (count ’em, ten) years before EITC comes around again. Of course, IRS has the burden of proof by preponderance of the evidence.

HHBJJJIJ: “After reviewing the entire record, we conclude that the facts deemed to have been established, combined with the affirmative allegations of fraud, and the affirmative allegations that petitioners improperly claimed the earned income credit and should be subject to the 10-year ban on claiming the earned income credit that petitioners are deemed to have admitted under Rule 90(c), collectively satisfy respondent’s burdens of production and proof as to each and every issue in this case. We therefore will grant respondent’s Motion for Default Judgment and enter a decision against petitioners.” Order, at pp. 5-6.

I’m sure Mr. Reilly, an argute schoolmate of Judge Albert G (“Scholar Al”) Lauber, is aware, as Judge Holmes stresses today, that “…the posttrial briefing runs into early next year.” Order, at p. 1. So an opinion is some distance away.

Nevertheless, the parties are unable to possess their souls in patience; hence today’s order and my reprise of a fifty-year-old commercial for a nostrum called Anacin.

The co-ex’rs, energetic types, throw into their opening post-trial brief ”… an annotated copy of the operating agreement of Sony/ATV Music Publishing. It’s [sic] origins are obscure, but petitioner argues that it is a helpful compilation of the original operating agreement to show its numerous amendments, but is not evidence. It is, however, a sort of summary exhibit, which is a type of evidence.” Order, at p. 1.

So Judge Holmes echoes the words of the harried headachy heroine, “…the original operating agreement and all its amendments are in the record. This enables the Court to slog through the agreement as amended without the addendum’s help….” Order, at p. 1.

Fighting Joe dropped a Form 211 on the Ogden Sunseteers, who blew him off. Joe petitioned. But now Fighting Joe wants to dismiss his own petition…without prejudice.

IRS objects.

To begin with, “’(T)he “Final Determination’ that the IRS’s Whistleblower Office (‘WBO’) issued to Mr. Insinga regarding his [target] claim (Doc. 1, petition Exhibit 1) is dated ‘July 18, 2106’– a date almost 80 years in the future. Neither party mentions this fact; but Mr. Insinga’s petition (at ¶ 2) implicitly admits that is a transposition of 2016; and the Commissioner likewise asserts that the date of the final determination is July 18, 2016; so we take that date as a given. (If either party attaches any significance or effect to the erroneous year date, it should so state in the filing it makes in response to this order.).” Order, at p. 1. (Emphasis by the Court)(Name omitted).

IRS objects because they want Fighting Joe to acknowledge that dismissal, per Jacobson (see above) must be with prejudice. After all, Fighting Joe had a thirty-day window to petition the blow-off, and that’s long gone. But Fighting Joe wants to fight again.

“The extent to which such a dismissal is with or without ‘prejudice’ is not completely articulated in Jacobson, where the motion to dismiss was unopposed, and the motion did not explicitly state whether the asked-for dismissal was to be with or without prejudice. The opinion does observe that the dismissal ‘leave[s the final determination] binding’, but it does not explicitly characterize the permissible dismissal as ‘with prejudice’. That phrase likewise does not appear in the subsequent order dismissing the case.” Order, at pp. 3-4.

So Judge Gustafson is in his element: a full-dress T. C. that seems to settle the issue, except it doesn’t.

And Judge Gustafson has as many hands as an octopus.

“On the one hand, it is clear that the dismissal of the Tax Court suit does (in the words of Jacobson) ‘leave binding on petitioner the [WBO’s July 2016] … determination to deny [his] claim for an award’ concerning [target]–but it is binding by virtue of Mr. Insinga’s inability to file another timely petition founded on that July 2016 determination. Since the time limit for filing a timely whistleblower petition is so very short–a mere 30 days–the claimant has only a very brief opportunity to file a timely petition. Because the WBO’s final determination on Mr. Insinga’s July 2016 claim was made almost 2 years ago, Mr. Insinga has no right to file another petition in our Court for review of that determination. If we grant his motion and dismiss this case, then it seems Mr. Insinga can never file another petition seeking a holding that the WBO abused its discretion in issuing its July 2016 final determination–even if we were to declare that the dismissal is ‘without prejudice’.” Order, at p. 4.

But whether dismissal here is with or without prejudice, Fighting Joe can always drop another 211 concerning target with Ogden, and if bounced, can petition. Of course, all he could do then is protest the latest bounce. But Section 7623(b)(4) says a blower can petition any determination, so even if this case is dismissed with prejudice, Fighting Joe can always start again.

“We understand this argument to ask us to rely on the Court’s evidentiary ruling in Belk as precedent we should follow here. Although we will not literally strike Exhibit A from each motion, we will not treat as precedent the evidentiary ruling in Belk as we decide how to rule on the motions now pending. Rule 50(f) provides generally that orders (in contrast with opinions) ‘shall not be treated as precedent”. We think that an evidentiary ruling given orally during a trial is similarly nonprecedential.” Order, at pp. 1-2.

Especially when the ruling came in another case and was made by another Judge.

However, to save IRS from cross-examining a multitude of experts, let the Murfams set out which expert wrote what, which expert will testify on direct as to what.

And as trial starts August 6, don’t waste a lot of time with written responses. Judge Gustafson will oblige with rulings at the trial.

Disarming the old arms’-length comparable uncontrolled transactions via sustaining the 2003 amendment to Section 482 (providing for matching income to expense), two out of three 9 Cir Judges (one of whom died before this decision was published) overturn TC (and incidentally give ex-Ch J L Paige (“Iron Fist”) Marvel another tough loss). 9 Cir has matching income to expense as what Congress wanted in 1986.

“The Commissioner’s allocation of employee stock compensation costs between related parties is necessary for Treasury to fulfill its obligation under § 482. Congress did not intend to interfere with qualified cost-sharing arrangements when those arrangements provided for the allocation of income consistent with the commensurate with income provision. H.R. Conf. Rep. No. 99-841, at II-638.” Opinion, at p. 43.

“As demonstrated by nearly a century of interpreting §482 and its precursor, the arm’s length standard is aspirational, not descriptive. It reflects neither how related parties behave nor how they are taxed.” Opinion, at p. 43. Guidelines…aspirational goals. The Pirates’ Code is alive and well.

Needless to say, there’s a dissent. The majority tramples on the APA, Chenery,Xilinx, and eviscerates the sacred arms’-length standard. Put the apostrophe where you will, arm’s-length is now the Venus de Milo of tax law.

Reversed. Without remand.

Pages 2 through 4 of the opinion list the attorneys on this case. Looks like there are more of them than were in my engineer company in Vietnam. I hope they all got paid.

Edited to add: When pore l’il ole Tax Court had this case, there were but sixteen (count ’em, sixteen) lawyers. See my blogpost “Sixteen Lawyers – Part Deux,” 7/27/15.

An author, teacher, advocate and trusted advisor, Lew Taishoff is a New York City-based attorney with 52 years of experience in corporate and individual tax and real estate matters. He is an Enrolled Agent, examined and admitted to practice before the Internal Revenue Service, and admitted to practice before the ... Continue reading →